Saving Money

5 Effective Cost Cutting Strategies to Increase Your Bottom Line

Welcome to the Atlanta Small Business Network’s original series, Money Talks with Tiffany Kent, a Certified Financial Planner and Founding Partner of Wealth Engagement, LLC, a Registered Investment Advisory firm. Each week, Tiffany will share her tips on how to raise, manage, and grow your business finances into a steady stream of wealth.

Transcription: 

Tiffany Kent:
As a business owner, you are probably burning money and you don’t even know it. My name is Tiffany Kent, and I’m a certified financial planner, an investment manager, and a business owner. And I’m here to tell you how you can stop throwing money away, so you can invest more in your business, or save more for retirement. In my previous life as a portfolio manager, and a stock picker working on Wall Street. One of the things that got me the most excited about the companies I invested in, was when a company announced a cost reduction. Why? Because cutting costs, can be just as effective on profitability, and the bottom line, as growing your revenue. Think about cutting expenses for your business as if you are tidying up your house. It’s a process, but once it’s done, then you can enjoy the benefits. If you keep a close eye on your expenses and keep them well organized, then you won’t have to go through this exercise again.

Tiffany Kent:
Here’s some basic math. If you’re bringing a million dollars of revenue, and your total expenses for office-based salaries, benefits, and other things that you need to run the business, are running at about $900,000 a year, then you have a pretty slim profit margin of just 10%, and you’re making a $100,000 a year. But what if you could critically look across the business, and cut some serious waste, and get your expenses down to $800,000 a year. Even if you don’t bring in another penny of revenue, you’ve just doubled your profit margin to 20%, then you would be making $200,000 a year. Many entrepreneurs and business owners get intimidated by cutting costs, or they just don’t know how to do it, or they just don’t know where to start. When I enter a business, I look around and think, I can’t believe the owner spends money on water bottles, with their business name printed on the bottle.

Tiffany Kent:
How does drinking a commodity like water from a branded water label, remind an existing client about what you are selling. It doesn’t. So paying up for a nicely printed logo on a water bottle is a waste. When you’re starting a business, you might mindlessly purchase services and products, that you may not need after you’ve been established. Or sometimes folks have a mindset they need to grow, grow, grow, grow, and spend, spend, spend, spend, especially if you’ve raised venture capital. But savvy, mature business leaders know that being relentless about controlling costs is just as important as growing the top line. Once you develop a cost control mindset, you don’t have to go back and cut costs again, because you will already be a lean, mean, operating machine. If you don’t learn to cut costs, it can cause you financial stress. Beginning to analyze your costs, can be a life-changing event. It can teach you to see the world differently.

Tiffany Kent:
How can this be? The more simple your costs are, the easier they are to manage. You can make better decisions, and easier decisions, because your business is well organized. Let’s first start with looking at some of your biggest line items. That usually means salaries, benefits, office space, and other real estate, maybe equipment or software, sales and marketing. Ask yourself questions like, which employees are your rock stars, and high performers. Is your current healthcare plan really meeting the needs of your company, or should you explore other options? Are you offering the right benefits package and perks that employees want? Are you paying for seats on your software platform, than you’re actually using? This is a huge area of potential savings, especially if you reduced head count, and you might not realize that you’re still paying for logins, for people that no longer work there.

Tiffany Kent:
Now look closer at each thing you’re paying for, and develop a way to measure effectiveness, and return on investment. So let’s just get right into it. Outsourcing is the first area we’re going to explore. Here is an example from a firm that could have benefited from outsourcing the function of the CFO. There was an employee, who, when she first started at the firm, was an assistant. She wanted to perform research on stocks, but never learned from her boss or others around her, how to do it. So she gravitated towards something else, and that was becoming the firm’s CFO. But, she wasn’t a CPA. But the first financials are pretty basic, with just a few employees. Managing the books, and cutting checks, is something that an outsource CFO, probably could have done for a few thousand dollars a month, or maybe $60,000 a year. Instead, the firm was paying this employee around $160,000 a year.

Tiffany Kent:
The firm had cut her job, and outsource this function, the firm would’ve had an additional $100,000 a year of additional cash. The firm could have hired a marketing person, that could bring in new clients and grow. But instead, the firm never brought in new clients, and therefore never did grow. You can make offensive decisions when times are good, so that when there is a recession, you’ll be in a much better financial position. Recently, I’ve been following my own advice about proactively cutting expenses, and I wanted to share a few observations about how I did it, and how it worked out. So let’s explore four more tips for tackling costs, and scoring some points on your profit margins. First, negotiate with all your vendors, every single subscription service, independent contractor, and utility company that you do business with. Everything is negotiable.

Tiffany Kent:
For example, take note of your shipping costs. When HelloFresh sends me my weekly meal kit, that I purchased to make it easier to cook dinner for my kids. I notice that they switched from FedEx, to a local shipping company. They probably switched to save on their annual shipping costs. So perform an analysis of your current shipping costs, shop around against the prevailing rates nationwide, and negotiate new pricing with the incumbent vendor, or switch. Something as simple as switching to a slightly smaller box, could also save you tons of money. I have a friend who has a storefront on Amazon. She told me, her company’s fulfillment and shipping costs, were eating 80% of her profits on every sale, and they couldn’t figure out why. This is going on for months, and it was killing their business. So one day, they took the time to dig into the situation, and discovered that they were using a box that was one half an inch, too big to be considered standard.

Tiffany Kent:
So they are being charged for oversized packaging and shipping on every single sale they made. They bought smaller boxes, and immediately tripled the amount of profit that they were making on every transaction. Ask for discounts from your large vendors. If you buy a ton of widgets, call your widget supplier and ask them to partner with you, on a cost analysis. So you can work together to find ways to trim cost. Have a specific number in mind, like you’re trying to compress expenses for those widgets, by 4 to 6%. Most of them will appreciate the candor and openness, and they’ll have a specific goal in mind to work towards. Check your thermostat, programmable and smart thermostats from companies like Honeywell, can cut your climate control costs without compromising comfort. Use a programmable thermostat to customize your facilities climate control schedule.

Tiffany Kent:
At a nine to five office, that probably means increasing the heat or AC in the morning, and dialing it back or turning it off completely in the evening, and overnight. If you have a large facility, you have negotiating power with your utility provider, and you lock and rates under a contract. Remember, everything is negotiable. The next idea, assess your annual subscriptions versus monthly subscription fees. While testing out some marketing services, I wasn’t sure if I was going to use them that regularly. So I decided to go with a higher monthly service fee, instead of an annual contract. It didn’t require yearly subscription, so I could cut it off at any time, if it wasn’t a good fit. There was another service provider that I did have an annual subscription with, and I wasn’t using the software, but couldn’t cut it off, and had to pay out the remaining contract. But we will circle back on this vendor later.

Tiffany Kent:
The third area to explore, is to rethink your priorities on salaries versus benefits. Studies show that more people are willing to accept lower salaries in favor of greater benefit packages, which could provide more security during the next downturn, if and when we have one. Reassess your healthcare plan and look critically at whether it’s still the best fit for your employees. Unfortunately, healthcare costs are also getting more expensive each year. Double digit increases in premiums for traditional healthcare plans, are common nowadays. And all the massive costs from COVID hospitalizations and treatments, haven’t trickled down the pipeline yet. Brace for huge increases in premiums in the years ahead, and start being proactive about it now. One reliable strategy for employers to reduce their share of employee healthcare costs without draconian measures, is to offer tax advantage health savings accounts. These accounts typically let people invest a certain amount of money, and that growth and that account is tax free, as long as they spend on qualified medical expenses. HSAs are great because they empower employees to take ownership of their healthcare choices, while shifting risk and costs away from the employer.

Tiffany Kent:
They also help employees create long-term nest eggs, for future medical expenses when they get older. Imagine you’re 55 years old, and you need a hip replacement. And you find a surgeon you really like and trust, who has a great reputation. But he or she is not in your network. Instead of going to another surgeon, you could use your HSA money to cover the out of pocket expenses of using the doctor you prefer. When combined with high deductible healthcare insurance plans that have lower premiums, and that are meant to cover only catastrophic expenses, HSAs could possibly serve as suitable replacements for traditional health insurance plans, whose generosity often comes at the substantial cost to employees and employers alike. So pro tip, if you’re thinking about adding a healthcare savings account, look into some of the independent plans out there, that everyone can sign up for.

Tiffany Kent:
It’s simple and transparent, and you can get signed up in just a few minutes. Every dollar you save in your HSA account today, can add up to a meaningful amount of money later, as you age and encounter more expensive health issues. The next area is to leverage social media advertising and marketing. According to AdEspresso, the average US Facebook ad cost per click, was 40 cents in the third quarter of 2020. That’s how much the ad buyer pays, every time a Facebook user clicks on your ad. A signal that they’re actually interested in whatever you’re selling, but they may not be quite ready to buy. That’s much cheaper than legacy ad types, like TV spots, which cost thousands of dollars, and reach passive viewers, not interested, or they could just be actively fast forwarding through. Meanwhile, organic social media marketing fueled by free posts and tweets, costs nothing but your time, and whatever labor is needed to produce it. In small enterprises, that labor might be your own.

Tiffany Kent:
Tag other companies, or respected professionals in your field to boost engagement and draw more eyeballs. For the best results, put together a formal content marketing plan, and be sure to avoid common social media mistakes, like waiting into politics or controversies that might damage your brand. Don’t try to be the next Wendy’s and roast your followers, keep it positive and above the line.

Tiffany Kent:
So in summary. Number one, review your highest expense items and determine if something can be outsourced. Like in the case of an overpaid QuickBooks employee. Number two, everything is negotiable. So go back to your vendors with financial data, and ask for cost reductions. Number three, review all of your annual subscription costs. Number four, rethink salaries versus healthcare costs. And lastly, leverage social media marketing. A word of warning, cutting costs isn’t fun, it’s an incredibly slow and tedious process of coming through your financial records, and calling vendors. But it is a mindset, which can produce amazing results and rewards. So try to start with the big vendors, that you do a lot of business with, where you are more likely to get some quick wins. And when you get a win, it’s very mentally rewarding.

Tiffany Kent:
As I mentioned previously, I was deeply into my own cost cutting efforts. I stopped using that software I mentioned earlier, about six months into my annual contract. I discovered a slight flaw in the software too. But they held me to my annual contract, and what let me terminate early. When I started writing this piece, I got motivated and decided to email the CEO, to tell them about the flaw. I mentioned that I have a pretty large social media following. He immediately responded, and agreed to refund me six months of service fees. I was so excited, fighting for my own interest and earning a little cash, made me even more motivated to tackle other big challenges. So I hope this has been helpful advice. I’m Tiffany Kent, and I’ll see you next week.


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